Einhorn case against Apple rests on rarely used legal tactic

By Nate Raymond

5 Min Read

David Einhorn, president of Greenlight Capital, speaks during the Sohn Investment Conference in New York, May 16, 2012.Eduardo Munoz

NEW YORK (Reuters) - Hedge fund star David Einhorn wants to force Apple Inc (AAPL.O) to share some of its huge cash pile with investors, but his lawsuit rests on a U.S. securities rule that has little court precedent surrounding it.

Einhorn's Greenlight Capital sued the iPad and iPhone maker in U.S. District Court in Manhattan on Thursday to try to prevent Apple from eliminating preferred stock from its charter. The suit is part of Einhorn's bid to pressure Apple to use some of its $137 billion in cash to issue perpetual preferred shares that pay dividends to existing shareholders.

The suit contends that Apple has violated Securities and Exchange Commission rules that prohibit companies from "bundling" together unrelated matters into a single proposal for a shareholder vote.

Establishing that Apple violated the rules could be tricky. Little to no case law exists on the question, and the SEC's own rule is relatively general with little guidance, legal experts said.

Still, James Cox, a professor at Duke University School of Law, said he thinks Einhorn "has a hell of good case."

"I think he's got Apple in the crosshairs," he added, saying that it "strikes me as fairly dramatic case of bundling."

The hedge fund manager is seeking an injunction to block a February 27 shareholder vote on the proposal, saying Apple violated Section 14 of the Securities Exchange Act of 1934. Arguments are due to be heard before U.S. District Judge Richard Sullivan on February 22. Apple has until February 15 to file a response with the court to the Greenlight complaint.

The proxy proposal at issue, Proposal No. 2, seeks to amend Apple's articles of incorporation in three ways: by providing for majority voting for directors, establishing a par value for Apple stock, and eliminating its ability to issue preferred stock.

Einhorn is represented by law firm Akin Gump Strauss Hauer & Feld, Greenlight's long-time outside counsel. No lawyer for Apple is yet listed on the court docket, and a representative declined to say who would represent Apple in the case.

It is unclear how Apple will respond in its formal reply to the lawsuits. On Thursday, Apple said Einhorn's lawsuit was "misguided" and that adoption of Proposal No. 2 would not preclude preferred share issuances in future.

"Currently, Apple's articles of incorporation provide for the issuance of 'blank check' preferred stock by the Board of Directors without shareholder approval," Apple said. "If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock."

Greenlight in its complaint said it supports two of the proposals but not getting rid of preferred stock. Einhorn deems preferred stock superior to dividends or share buybacks, and has separately put forward a proposal for an issuance of Apple preferred stock with a perpetual 4 percent dividend.

But as Apple's proxy proposal is structured, Greenlight said, shareholders have "no choice but to either vote in favor of an amendment they oppose, or against an amendment they support."

Few lawsuits have ever been filed challenging proposals under the rules, a situation some legal experts attributed to the normally passive nature of shareholders.

"In most cases you're not going to get a lot of complaining about bundling," said Brian Slipakoff, special counsel at law firm Duane Morris in Philadelphia.

In one of the few related lawsuits, the 2nd U.S. Circuit Court of Appeals in New York in 1999 recognized an implied private right of action by shareholders suing over alleged antibundling rule violations.

That precedent could back Einhorn in his legal standing to bring the case. The appeals court ruling was cited by Greenlight in additional court papers filed late on Thursday.

Francis Vasquez, a lawyer with the law firm White & Case who is not involved in the case, said Apple may argue that because the stockholder proposals in Proposal 2 are all amendments to the charter, they are properly related.

The California company has another five proposals up for a vote, which are not being challenged by Einhorn and do not involve amending Apple's charter. Those measures focus on matters such as director elections and executive compensation.

"Apple's first argument likely is going to be, 'Look, these are all amendments we put in one place, they don't have to do with the other items,'" Vasquez said.

The antibundling rules date to 1992. John Coffee, a professor at Columbia Law School, said the idea was to "prevent managements from bribing shareholders with a sweetener into voting for a proposal they would otherwise reject."

The case is Greenlight Capital LP, et al., v. Apple Inc., U.S. District Court, Southern District of New York, 13-900.